Stocks should remain part of your portfolio even after you've retired. Not only can some stocks make for solid income investments, but retirees should also continue to invest a portion of their nest egg for growth. After all, the average American who reaches age 65 will live past age 80, and far too many older retirees outlive their assets and struggle to make ends meet late in life.
But at the same time, making the wrong stock choices can end up costing you in lost returns and higher taxes, and in some cases it can be a far worse move than not owning stocks at all.
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When you ignore the risk of the "next big thing"
Since going public in 2015, the Bitcoin Investment Trust (GBTC 1.70%) is up a remarkable 1,450%. For people who got even luckier in their timing, Bitcoin Investment Trust shares are up over 2,620% from the lows in late 2015 until recent prices.
To put that in real-money terms, a $10,000 investment in the Bitcoin Investment Trust at launch would be worth over $145,000 today. That same $10,000 investment a few months later would be worth more than a quarter-million dollars at recent prices. I don't know of very many retirees who couldn't use an extra six figures in the bank.
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Here's the catch: Anyone who bought from mid-August through early September of this year has lost money and potentially stands the risk of losing even more very quickly. That's because bitcoin and its other "cryptocurrency" peers offer very, very little in the way of predictable value. In other words, it's nearly impossible to know what happens next.
Cryptocurrencies are caught up in a speculator-driven environment that has pushed their values far beyond what their utility as a currency alone supports. And when you invest in something that's seeing its price being driven by speculation, and not the intrinsic value of the asset itself, you expose yourself to losses that can come quickly and very unexpectedly.
Don't get me wrong: I'm not calling a top for bitcoin or any other cryptocurrency. They could go much higher from here. But I am emphatically stating that if you're risking money you really can't afford to lose in an asset that's under the thrall of speculators, you expose yourself to very big, very sudden losses. If you can't afford to lose the money you have tied up in any cryptocurrency investment, it's probably time to get out now.
Owning the "right" stocks in the "wrong" account
Retirees almost always love to own dividend stocks, and for good reason. Income is an important consideration, and if you can own a stock that pays a solid distribution and is able to increase it often, that can mean you don't have to sell off parts of your holdings to cover your bills.
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This consideration can lead retirees to invest in master limited partnerships, generally called MLPs, where some of the best income stocks available reside. This group of investments includes one of my favorite stocks, Brookfield Infrastructure Partners (BIP +0.22%), along with energy logistics giants Enterprise Products Partners (EPD +0.27%) and Magellan Midstream Partners (MMP +0.00%), and renewable-energy provider 8Point3 Energy Partners (CAFD +0.00%). With dividend yields of 4%, 6.3%, 5%, and 6.6% at recent prices, respectively, and strong track records of payout growth, it's obvious why retirees would be drawn to these stocks.
Here's the rub: These great income stocks can be terrible investments if you own them inside your IRA or 401(k) because of a simple tax complication called unrelated business taxable income, or UBTI.
To put it another way, MLPs can be wonderful investments for retirees. But it can backfire if you own them in a retirement account because you could end up with an unexpected tax bill.
High-fee mutual funds
While mutual funds aren't stocks per se, a huge number of retirees own stocks by investing in a mutual fund. This isn't in and of itself a bad thing, since there are plenty of solid, low-cost funds that make ideal ways for retirees -- or anyone else -- to invest in stocks.
The catch is that when the fund is run by a manager who actively picks the stocks the fund invests in, there's a 90% chance that you -- the fund investor -- will pay more in fees while also getting worse returns. In other words, it's like picking between two cars that are identical, except one has a slightly higher payment, gets worse fuel economy, and will have a lower resale value.
Instead of investing in high-fee, subpar returning funds, low-cost index funds will almost always result in better returns and cheaper fees.
